Trio of states join Dodd-Frank court challenge

By Peter Schroeder - 09/21/12 10:33 AM ET

Michigan, Oklahoma and South Carolina have joined a legal challenge to the Dodd-Frank financial reform law.

In particular, the Republican state attorneys general are contesting a piece of the Wall Street overhaul that gives the Treasury secretary the power to liquidate a financial institution that poses a threat to the financial system, arguing it creates "death panels for American companies" and give states little ability to protect, for example, state pension contributions wrapped up in failing companies. An amended complaint was filed in federal court in Washington on Thursday.

"Michigan's public-employee pension funds hold substantial fixed-income investments in large financial institutions," said Michigan Attorney General Bill Schuette. "Dodd-Frank gives the U.S. secretary of the Treasury essentially unlimited power — with no judicial or congressional oversight — to pick winners and losers among creditors when these large financial institutions go bankrupt. This lawsuit is necessary to safeguard Michigan's pension funds and protect current and future retirees."

The power in question being targeted is the orderly liquidation authority granted to the Financial Stability Oversight Council (FSOC), a Dodd-Frank-created regulatory body headed by the Treasury secretary. The panel, which gathers top financial regulators in one place, is charged with overseeing broad threats to the financial system, and has the power to step in and wind down failing institutions it views as a threat to the entire system.

The attorneys general are signing on to a lawsuit originally filed in June by a small Texas bank, alongside two conservative advocacy groups. In the original suit, State National Bank, the Competitive Enterprise Institute and the 60 Plus Association contend that that orderly liquidation authority, alongside the creation of the Consumer Financial Protection Bureau (CFPB), violates the Constitution and hands far too much power to regulators. The attorneys general did not sign on to the challenges to the CFPB.

C. Boyden Gray, who served as White House counsel under President George H.W. Bush, is representing the plaintiffs in court.

The suit targets the CFPB as well, arguing that it is unconstitutional and too powerful, since Congress does not set its budget. It also contends that the bureau's regulations are not subject to sufficient checks, and that the president is too restricted in removing its director from power.

President Obama's decision to recess-appoint Richard Cordray to head the bureau, despite the fact that Republicans were holding pro forma sessions in an effort to prevent such moves, has led to a series of rumblings about legal challenges.